Bank of Finland's Preparedness for Financial System Instability
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Loading... - Akila Salah
- 17 Oct 2024
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The Bank of Finland is actively preparing for potential disruptions in the financial system by collaborating with both domestic and international financial stability authorities to develop joint crisis management strategies. This preparation involves creating tools to address financial system crises, which include the resolution of distressed banks, deposit insurance schemes, and emergency liquidity assistance for banks.
As part of its mandate, the Bank of Finland plays a crucial role in maintaining the reliability and efficiency of the payment system and the overall financial system. To effectively manage financial instability and crises, the Bank engages in extensive cooperation with various authorities responsible for financial stability, including central banks, financial supervisors, resolution authorities, and relevant ministries across national, European, Nordic, and Baltic levels.
This cooperation encompasses several key activities, such as maintaining crisis preparedness, exchanging information and status reports for crisis management, organizing crisis management exercises, developing plans for crisis situations, and coordinating communication among authorities.
In the event that the stability of the financial system is threatened, the Bank of Finland, in conjunction with other authorities, is prepared to take decisive action to stabilize the situation and mitigate negative impacts. The tools available to financial stability authorities for responding to crises include the resolution of distressed banks, deposit insurance schemes, and emergency liquidity assistance.
Within the framework of the EU's banking union, euro area countries are subject to the supervision of banks by the Single Supervisory Mechanism (SSM), while the reorganization of banks in severe crisis situations falls under the purview of the Single Resolution Mechanism (SRM). Deposit guarantee funds are managed by national authorities. Although the Bank of Finland has a representative on the Supervisory Board of the SSM, it is not part of the decision-making bodies of the SRM. However, it contributes to the development of resolution strategies by collaborating with the national resolution authority, the Financial Stability Authority, participating in resolution colleges for cross-border banks, and providing opinions on legislative proposals.
Additionally, the Bank of Finland monitors and supports the development of the EU's banking union. Euro area credit institutions can access central bank credit through standard monetary policy operations and, in exceptional cases, through emergency liquidity assistance (ELA). The provision of ELA is managed by national central banks, including the Bank of Finland, and is governed by the Eurosystem's common principles and procedures. ELA can only be extended to solvent financial institutions facing temporary liquidity challenges.
Crisis response procedures are pre-agreed among financial stability authorities, often formalized in Memoranda of Understanding, ensuring a coordinated and effective approach to managing potential financial crises.
